The Federal Reserve Open Market Committee has created a series of parabolic bubbles over the past 16 years and subsequently popped them in policy moves that raised raise rates too high and cut rates too low. Today, we focus on the inflating and deflating of the gold and oil bubbles, and the rise and fall of the euro vs. the dollar.
We begin with the steady but volatile decline in bond yields.
Despite the ups and downs of the federal funds rate, the yield on the U.S. Treasury 30-year bond has been declining since the beginning of 2000. When the 21st century began, the federal funds rate was 5.50%, on the rise since June 20, 1999, with the rate raised from 4.75% to 5.00%. The yield on the U.S. Treasury 30-year bond set its new-millennium high of 6.75% in January 2000, then set its cycle low of 2.22% in January 2015.
Comex gold was drifting lower as the year 2000 began, and traded as low as $255.1 the Troy ounce in February 2001. West Texas Intermediate crude oil prices were rising from a low of $11.28 per barrel in December 1998, entering 2000 at $27.18, then traded as low as $19.33 in December 2001. The euro vs. the dollar entered the new millennium just above parity, then traded as low as 0.8225 in October 2000 before beginning a solid uptrend.
After the federal funds rate was hiked to 6.50% on May 16, 2000, market dynamics began to change. The FOMC began to cut rates in January 2001 and after a series of cuts the rate was at 3.50% when terrorists felled the World Trade Center towers on Sept. 11, 2001. Rate cuts followed six days later and continued until the funds rate was cut to 1% on June 25, 2003. By this time the bond yield was declining, bubbles in gold and oil were starting to inflate, and the euro was on the rise vs. the dollar.
Let's take a look of the weekly charts for bonds, gold, oil and the euro, and consider the risk vs. reward for these markets in 2016.
Here's the weekly chart for the 30-year bond.
Courtesy of MetaStock Xenith
The weekly chart for the yield on the 30-year U.S. Treasury bond shows a downtrend from the 6.75% high in January 2000 through the lower highs of 5.44% in June 2007 and 4.79% in February 2011. If yields rise in 2016, the yield downtrend comes in at 3.84% around mid-year. Note how the 200-week simple moving average is a nearby support at 3.14% this week.
The high yield in June 2007 followed the series of 17 consecutive rate hikes of 0.25% by the FOMC that raised the rate from 1% in June 2003 to 5.25% in June 2006.
The first rate cut to 4.75% occurred on Sept. 18, 2007, as evidence built that a financial crisis was underway. This began the next wave lower for the bond yield in a plunge to as low as 2.51% in December 2008, just as the FOMC completed its 10th rate cut, taking the federal funds rate to 0% to 0.25% on Dec. 16, 2008, where it stayed for seven years. The cycle low for the bond yield was 2.22%, set in January 2015.
In my judgment, even if the FOMC raises the funds rate to 0.75% to 1% in 2016, which is a consensus, a key level to hold in January is 3.18% and 3.43% through June. If global economic growth slows and the FOMC stalls raising rates, the bond yield can decline again to 2.26% by the end of 2016. Note that the International Monetary Fund expects global growth to be "disappointing and uneven" in 2016.